Overview
Eric Nuttall, Senior Portfolio Manager of Ninepoint Energy Strategies, delivers a data-heavy update on an oil market he describes as historically disconnected from its own fundamentals. As of recording, oil trades in the high $60s, below pre-war levels, even though global oil inventories sit at their lowest recorded levels for this time of year. The market has swung from a 177 million barrel surplus to a 141 million barrel deficit against the five-year average, inventories have fallen roughly 430 million barrels since the war began (a 508 million barrel swing versus last year, or 4.2 million barrels per day), US commercial crude stocks are at their lowest since at least 2016, and refining crack spreads sit near all-time highs, evidence of genuine product shortages heading into Independence Day.
The US Strategic Petroleum Reserve now sits at 325 million barrels, the lowest since June 1983 and near what former presidential energy advisers, including Amos Hochstein, described as a functional engineering floor around 300 million barrels. Nuttall reads political behavior, including Vice President Vance's public comments about using an agreement to refill stocks and the timing of a truce announcement with Iran ahead of a Monday market open, as evidence the administration is acutely sensitive to energy prices heading into November midterms. Regression of inventories to price, historically the best proxy for balance, implies a Brent fair value in the $130 to $140 range, versus a spot price in the high $60s.
Nuttall attributes the disconnect to three forces. First, the financial market for oil dwarfs the physical market, with roughly 50 paper barrels traded for every barrel consumed, and net speculative length has been liquidated from 511 million barrels to 160 million, returning sentiment to pre-war levels associated with fear of a supply glut. Second, there is a short-term surge of supply: roughly 140 million barrels of previously sanctioned Iranian oil were liberated, and a backlog of tankers has been exiting the Persian Gulf at about ten ships a day. Meanwhile, real-time data shows about 9.4 million barrels per day of production remains shut in across Saudi Arabia, Iraq, Kuwait, the UAE, Qatar, and Iran, and only about 50 percent of oil loadings correspond to sustainable export levels.
Third, and most decisive, is China. Chinese oil imports fell by a staggering 4.9 million barrels per day in June, forfeiting roughly 450 million barrels of imports and offsetting much of the lost Middle Eastern supply. Nuttall argues this is unsustainable stockpile depletion, not demand weakness, since flight data, road mobility data, and near-record crack spreads all point to strong end demand. When China returns to the market, the underlying tightness becomes visible and the oil price finds its floor.
On positioning, Ninepoint held roughly 25 percent cash a month ago in anticipation of a resolution sell-off, cushioning the drawdown, and has since deployed aggressively, taking cash from about 25 percent to six. With energy equities discounting roughly $60 WTI and Nuttall's estimate of the marginal cost of supply at $70, and with limited non-OPEC growth beyond US shale, Guyana, Brazil, and a bottlenecked Canada, he sees meaningful upside on what he considers now conservative price assumptions.
Why This Matters
This update is a working demonstration of how a professional energy investor separates price from value. The core tool, regressing global inventories against price to estimate fair value, is durable and transferable to any storable commodity. When a proven relationship implies $130 to $140 Brent while the market trades in the high $60s, the disciplined response is not to abandon the framework but to identify the specific, measurable mechanisms causing the gap: paper market liquidation, a temporary tanker surge, and one enormous but unsustainable buyer strike from China.
The episode also documents how paper markets can overwhelm physical reality in the short run. Fifty financial barrels trade for every physical barrel consumed, so sentiment, measured through net speculative length, can drive price to levels the physical balance cannot justify for months at a time. Understanding that dynamic, and having the balance sheet patience to hold through it, is the difference between being shaken out at the bottom and deploying into it.
Finally, the positioning discussion is a template for process. Ninepoint anticipated the sell-off, held 25 percent cash into it, and deployed as fear peaked, with the marginal cost of supply serving as the valuation anchor. For anyone building resource-sector conviction, the lesson is that geopolitical noise and political incentives (an administration managing gasoline prices into midterms) create the very dislocations that reward investors who track physical data instead of headlines.
Key Points
- Oil trades in the high $60s, below pre-war levels, while global oil inventories sit at their lowest recorded levels for this time of year, having swung from a 177 million barrel surplus to a 141 million barrel deficit against the five-year average.
- Inventories have fallen roughly 430 million barrels since the war began versus a 78 million barrel build last year, a 508 million barrel swing equal to about 4.2 million barrels per day of tightness. Floating storage has been worked down from a 160 million barrel high toward 110.
- US commercial crude inventories are at their lowest since at least 2016, product stocks show clear gasoline and distillate shortages, and refining crack spreads are near all-time highs at $57 per barrel, up 182 percent year-to-date.
- The US Strategic Petroleum Reserve sits at 325 million barrels, the lowest since June 1983 and close to the roughly 300 million barrel level former energy advisers, including Amos Hochstein, describe as an engineering floor below which meaningful draws are not possible.
- Regressing global inventories against price, historically the best determinant of over- or under-supply, implies a Brent fair value around $130 to $140, creating a historic disconnect with the spot price.
- The financial market dwarfs the physical one: roughly 50 paper barrels trade for every barrel consumed. Net speculative length has been liquidated from 511 million barrels to 160 million, returning sentiment to pre-war, glut-fearing levels.
- Short-term supply is temporarily inflated by roughly 140 million barrels of unsanctioned Iranian oil and a surge of backlogged tankers exiting the Persian Gulf at about ten ships per day, a flow expected to take one to two more months to absorb.
- Real-time data shows about 9.4 million barrels per day of production remains shut in (8.6 million across Saudi Arabia, Iraq, Kuwait, the UAE, and Qatar, plus roughly 800,000 from Iran), and oil leaving the strait is running at only 50 percent of loadings, evidence current exports are not sustainable.
- The missing price spike comes down to China: June imports fell by 4.9 million barrels per day, forfeiting roughly 450 million barrels and offsetting lost Middle Eastern supply by draining visible and invisible domestic stockpiles.
- Demand is not the problem. Flight data, TomTom road mobility, and near-record crack spreads all indicate strong global product demand; China's buyer strike is unsustainable and its return to the market is the catalyst for oil to find its floor.
- Iraq is the key laggard among curtailed producers, down 2.5 million barrels per day from prior highs, with bureaucracy and geology expected to keep those barrels offline longest. Saudi Arabia and the UAE are expected back quickly.
- Ninepoint held roughly 25 percent cash a month ago anticipating a resolution sell-off, then deployed aggressively into weakness, cutting cash to six percent. With equities discounting about $60 WTI against a $70 marginal cost of supply, and only US shale, Guyana, Brazil, and a bottlenecked Canada able to grow, the upside case rests on conservative assumptions.
Quotable
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Eric Nuttall
"We are now lower than pre-war levels, which is staggering to some of us that try to look at oil balances."
Frames the entire episode in one line: the price is behaving as if the supply shock never happened, while the physical data says otherwise.
Eric Nuttall
"For every one barrel that is consumed, 50 of them get traded on a daily basis."
The cleanest expression of the two-markets problem. Paper flows can dominate physical reality in the short run, which is exactly what a 511-to-160 million barrel liquidation in net length demonstrates.
Eric Nuttall
"You can't have weak product demand and have crack spreads at their almost record highs. When I say record, I mean it in any period in human history."
A sharp falsification test. Refining margins are a direct market signal of end-product scarcity, so the weak-demand narrative fails on its own evidence.
Eric Nuttall
"Sometimes in life, you don't get what you want. We did not want the $150, $170 oil because that was really going to stoke recessionary fears."
Reveals the equity investor's real objective. The best outcome for oil stocks is a durable, high-but-not-destructive price, not a demand-killing spike, which shaped the fund's plan to sell into any surge.
Eric Nuttall
"You cannot drop your imports by 5 million barrels per day when your domestic demand remains very strong. Eventually they will have to come back to the market."
The core thesis compressed into two sentences. China's buyer strike is stockpile depletion, not demand destruction, and its reversal is the catalyst for the price floor.
Concepts
Core Frameworks
Inventories as the Compass
Nuttall's primary valuation tool is the historical regression between global oil inventories and price. If inventories are falling, the market is undersupplied, regardless of what headlines or sentiment say. This relationship has served as a reliable fair-value proxy for decades. Applied today, with inventories down 4.2 million barrels per day since the war began and at record lows for the season, the regression implies Brent fair value in the $130 to $140 range. The framework does not predict when price converges to fair value, only that the gap is real and measurable.
Two Markets for Oil: Physical vs. Paper
The physical market moves roughly 104 to 105 million barrels per day. The financial market trades about 50 barrels for every one consumed. In the short run, the paper market sets the price, and paper positioning is driven by sentiment and fear rather than barrels in tanks. Net speculative length collapsed from 511 million barrels to 160 million, the lowest since February 2026, returning positioning to levels last seen when the market feared "the most anticipated oil supply glut in history." Understanding which market is driving price at any moment is essential to interpreting moves.
Net Speculative Length as a Sentiment Gauge
Nuttall uses net length in futures positioning as a proxy for market sentiment. Its collapse back to pre-war levels signals that the fear premium has been fully unwound and speculative capital has capitulated, even though half a billion barrels of inventory were consumed in the interim. Historically, extreme lows in positioning against tightening physical fundamentals mark the setups where price risk is skewed to the upside.
Marginal Cost of Supply as the Valuation Anchor
When political risk premiums evaporate and sentiment resets, the durable question becomes: what price is required to bring on the marginal barrel? Nuttall pegs that at roughly $70, with US shale as the effective marginal supplier in its "twilight" phase of only modest growth at a price. Pre-war OPEC spare capacity was estimated at just 1.4 million barrels per day, and only about four of 79 non-OPEC producers can grow: US shale, Guyana, Brazil, and Canada, with Canada bottlenecked for the next one to two years. Equities discounting $60 WTI against a $70 marginal cost is the source of the upside case.
Market Mechanics
Crack Spreads as a Demand Truth Serum
Refining margins, the spread between crude input cost and refined product prices, are near all-time highs at $57 per barrel against a March record of $59, up 182 percent year-to-date. Record crack spreads are incompatible with weak end demand: refiners can only command those margins when gasoline, diesel, and jet fuel are genuinely scarce. This makes crack spreads a powerful cross-check against demand-weakness narratives built on ambiguous import data.
The SPR Floor
The US Strategic Petroleum Reserve sits at 325 million barrels, the lowest since June 1983. Conversations in Washington and public remarks from Amos Hochstein, former energy adviser to President Biden, point to roughly 300 million barrels as a functional engineering floor below which meaningful withdrawals are not viable. This means the shock absorber that has been suppressing price signals is nearly exhausted, and the administration appears aware of how acute the situation is. Non-US SPR data is poor, with two to three month lags, adding to the opacity.
The Tanker Surge and Loading Divergence
The short-term supply glut is partly an unwind of a logistical backlog: ships stuck in the Persian Gulf for months are exiting at roughly ten per day, alongside about 140 million barrels of previously sanctioned Iranian oil off the coasts of India and China that became purchasable. Rory Johnston's work shows oil leaving the strait is running at only 50 percent of loadings, meaning the current export flow is a temporary flush, not a sustainable level. Nuttall expects one to two months for the market to absorb the surge, with inbound vessels into the strait as the key indicator to watch.
Curtailed Production: The Haves and Have Nots
Roughly 9.4 million barrels per day of production remains shut in: 8.6 million across Saudi Arabia, Iraq, Kuwait, the UAE, and Qatar per real-time OilX-style data, plus about 800,000 from Iran. At the peak, curtailment estimates ran as high as 15 million barrels per day before Saudi ramped the East West pipeline and the Emiratis expanded Fujairah capacity south of the strait. The haves (Saudi Arabia, UAE) can restore quickly; the have nots, chiefly Iraq (down 2.5 million barrels per day), face bureaucratic and geological barriers that will keep their barrels offline longest.
China's Buyer Strike
The single factor that prevented the anticipated price spike was China dropping oil imports by 4.9 million barrels per day in June, forfeiting roughly 450 million barrels. This offset much of the lost Middle Eastern supply. Possible motives include easing pressure on regional economies, but the mechanics are clear: China is draining SPR, refined product, and largely invisible stockpiles while domestic demand stays strong. Because that depletion is finite, the strike is unsustainable, and China's return to the import market is the catalyst that exposes the underlying tightness.
Political and Behavioral Observations
Political Sensitivity to Energy Prices
Nuttall reads administration behavior as revealing acute price sensitivity ahead of November midterms: strikes on Iranian infrastructure reported after Friday's close, a truce announcement an hour before Monday's open, and Vice President Vance publicly stating the president's instruction is to use the agreement to "refill the world's oil economy" and rebuild stocks. An administration that celebrates Dow records has strong incentives to manage gasoline prices, which helps explain both the timing of announcements and the absence of a political risk premium in the current price.
Geopolitical Volatility Fatigue
Trading desks in Canada and the US consistently reported that investors recognized the oil market's tightness but could not endure the headline volatility of the geopolitics, sitting on the sidelines rather than holding positions through unpredictable announcements. With consensus now viewing that phase as over, sidelined buying power is beginning to flow back into energy names. Fatigue-driven apathy at the point of maximum fundamental tightness is precisely the kind of behavioral dislocation contrarian positioning exploits.
Not Wanting the Spike: Equity Investors vs. Oil Bulls
As equity investors, Ninepoint's playbook was to sell length into any spike toward $150 to $170 oil, because beyond a certain price the correlation between oil stocks and oil price breaks down as recession and demand-destruction fears take over. A price high enough to kill demand produces an enduring hangover. The desired outcome is a sustained price near or above the marginal cost of supply, not a blow-off top. This distinction between what benefits the commodity trade and what benefits equity holders shapes position management.
Barbell Positioning: Offense and Defense
Anticipating a resolution sell-off, the fund moved to roughly 25 percent cash a month prior, framed as 75 percent offense, 25 percent defense. That defense moderated the drawdown when the sell-off arrived, and the cash was then deployed aggressively into the resulting opportunities, taking cash from 25 percent to six. The sequence, anticipate the catalyst, hold dry powder, deploy into fear, is a repeatable template for managing volatile, thesis-driven sectors.
Implementation
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Anchor Your Oil View to Inventories, Not Headlines
Track global and US commercial inventories relative to the five-year average and treat the inventories-to-price regression as your fair value compass. When inventories are drawing, the market is undersupplied regardless of price action. Weekly US data (EIA) is timely and free; supplement with global estimates where possible.
Separate the Paper Market from the Physical Market
Before interpreting a price move, check net speculative length in futures positioning. A collapse in net length against tightening physical data signals sentiment capitulation, not fundamental deterioration. Use positioning extremes as a contrarian input rather than a reason to abandon the physical thesis.
Use Crack Spreads to Falsify Demand Narratives
When a weak-demand story circulates, check refining margins first. Near-record crack spreads are incompatible with weak end-product demand. Add mobility cross-checks such as flight data and TomTom road traffic to confirm whether consumption is actually softening or the narrative is built on a single ambiguous data point.
Watch China's Import Data as the Primary Catalyst
China's 4.9 million barrel per day import cut is the swing factor suppressing price. Monitor monthly Chinese import figures and tanker-tracking estimates for the reversal. When imports normalize, the depleted global inventory picture becomes visible in price. Build alerts or a monthly review habit around this single variable.
Track Inbound Vessels and Curtailed Production, Not Reopening Headlines
Headlines say the strait is open and things are back to normal; real-time data shows 9.4 million barrels per day still shut in and exports running at only 50 percent of loadings. Judge supply recovery by inbound vessel counts into the Persian Gulf and curtailment estimates, and expect Iraq's 2.5 million barrels per day to be the slowest to return.
Value Energy Equities Off the Marginal Cost of Supply
Estimate what oil price the equities are discounting (currently about $60 WTI per Nuttall) and compare it to the marginal cost of supply (about $70). The gap is your margin of safety. When equities discount a price below what is required to bring on the marginal barrel, the setup favors owning them even without heroic price forecasts.
Hold Dry Powder Ahead of Known Catalysts
Replicate the 75/25 offense-defense structure: when a resolution event or catalyst with sell-off potential is foreseeable, raise cash in advance rather than reacting after the fact. The defense moderates drawdowns and converts into offense exactly when fear creates the best entry prices.
Pre-Plan Your Response to a Price Spike
Decide in advance the price zone where you become a seller. For oil equities, a spike toward demand-destroying levels ($150 to $170) breaks the stock-to-commodity correlation and stokes recession fears. Write down the levels where you trim, so the decision is mechanical rather than emotional when the spike arrives.
Factor Political Incentives into Timing
Recognize that administrations facing elections actively manage energy prices through SPR policy, sanctions relief, and the timing of announcements. Treat pre-election periods as ones where price signals are politically suppressed, and position for the eventual reassertion of physical fundamentals rather than trading each headline.
Tools & Resources
Mentioned Resources
| Resource | Description |
|---|---|
| Ninepoint Energy Strategies | Eric Nuttall's energy funds at Ninepoint Partners, the source of the positioning and portfolio commentary in this update. |
| Mike Rothman / Cornerstone Analytics | Oil market analyst cited for pre-war inventory draw figures (430 million barrels drawn versus a 78 million barrel build last year). |
| Energy Aspects | Research firm cited for the inventories-to-price regression chart implying $130 to $140 Brent fair value. |
| Kpler | Vessel-tracking and commodity data platform used to monitor tankers leaving the Persian Gulf and Chinese import flows. |
| OilX (Energy Aspects) | Real-time oil data and nowcasting platform, now part of Energy Aspects, used for curtailed production estimates (8.6 million barrels per day across Gulf producers as of recording). |
| Rory Johnston / Commodity Context | Oil macro analyst cited for the divergence between tanker loadings and oil actually exiting the strait (roughly 50 percent). |
| TomTom Traffic Data | Publicly accessible road mobility data used as a cross-check on global oil product demand strength. |
Suggested Resources
| Resource | Description |
|---|---|
| EIA Weekly Petroleum Status Report | The timely, free US inventory data Nuttall notes the market watches most closely. The primary tool for tracking the inventory compass yourself. |
| CFTC Commitments of Traders | Weekly futures positioning data for tracking net speculative length, the sentiment gauge central to Nuttall's paper-market analysis. |
| The New Map by Daniel Yergin | Definitive book on the intersection of energy, geopolitics, and markets, directly complementing the Middle East supply dynamics discussed here. |
| The Prize by Daniel Yergin | Pulitzer-winning history of oil, essential background for understanding SPR policy, OPEC behavior, and supply shocks in historical context. |
| S&P Global Commodity Insights | Broad coverage of crack spreads, refining margins, and physical crude markets for ongoing verification of the product-tightness thesis. |
Source Material
Original source attribution, metadata, and publication details are available in the Overview tab. This source material may originate from a transcript, article, report, presentation, newsletter, notes, or other media. Where applicable, transcription, formatting, extraction, or attribution errors may exist. Verify against the original source before republishing or relying upon the material.
[00:03]
Hi, it's Eric Nutell of the 9point Energy Strategies with a update on the status of the oil markets. We haven't done one of these in a few weeks time. There's quite a bit to cover. I'm going to be looking down more normally than uh more than normal just given the amount of numbers to try to cover. Uh as we record this, the oil price sits in the high 60s. Uh we are now lower than pre-war levels, which is staggering to some of us that try to look at oil balances. Uh let's cover okay where are we now where are we likely to go and what's happened over the past couple of months as we sit global oil inventories at their lowest levels in recorded history for this time of year we have gone since from a kind of a pre-war till now we've gone from a 177 million barrel surplus to 141 million barrel deficit relative to the 5-year average as I mentioned inventories are very very low we know that strategic stock piles have been depleted a couple numbers Mike Rothman who is um somebody that we've been reading and following and talked to
[01:00]
for many many years points out that from pre-war inventories have fallen by 430 million barrels. Uh in contrast to last year a bill is 78. So that's about a 508 million barrel swing 4.2 million barrels per day. So clearly the market is has has been tight. When we look at uh floating storage as an example that a lot of that has been absorbed. So pre-war it was 100 million barrels high 160 today it's 110. We've worked off 15 million barrels of those. As we look at more visible things such as US commercial inventories, which I think the market really looks at because it's timely and it's free and it's uh more obvious, they now sit uh at their lowest level since at least 2016 from an oil perspective. When we look at product stocks as well, very clearly there is a shortage in terms of gasoline distillate. We talked about in prior recordings how we thought there would be uh you know shortages regional shortages by uh Independence Day which is uh tomorrow. You can see that evidenced in
[02:01]
crack spread. So like the margins that refineries are getting for uh generating uh gasoline and diesel are at all-time highs. So that's further evidence and as I mentioned from an SPR perspective so that strategic petroleum reserves data availability in non US is pretty poor the two or three month lag. So, as we looked at the United States, they now sit at 325 million barrels. That's the lowest since June 3rd of 1983. We talked about before how we thought we were reaching a floor. We were in Washington about uh 3 four weeks ago. Had some very incredible conversations with former people that were energy adviserss to presidents and intimate with SPR levels. Uh we had done a tweet from uh Amos Hawkstein uh somebody who very very intimate with the global energy market, former energy adviser to uh President Biden. And in public remarks, he commented that he was not he thought that the 300 million number was
[03:00]
a functioning uh floor for the SPR when he had talked about it. There's there was no engineer in the White House that thought you could meaningfully get below that number. And so it it felt like the administration was becoming much more aware of how acute the problem was that the oil market was heading towards. Just a few days ago, the vice vice president JD Vance gave a TV interview. Uh he uh quote said, "What the president has told us to do is to use thisou to sort of refill the world's oil economy to refill some stocks and then see where the hand uh is unquote." So, this is an administration, you know, they tweet out every time the the Dow hits alltime records. Just a week ago, uh they started, you know, more love taps or there were more strikes on Iranian uh infrastructure and and missile sites, etc. Just so happened to uh be reported as the market closed on a Friday afternoon, one hour before the market opened on the Monday, they they at least one way tweeted that, you know, there
[04:01]
has been a truce agreed to between the Iranians and the Americans. And so there's a an obvious sensitivity around the impact that rising energy prices were going to have on the overall stock market on clearly oil price gasoline price with the midterm elections looming in uh November. And so we have seen the oil price sell off more than we we thought that it it would. It's interesting when you look at uh historical correlation. We've put out charts that show this. energy aspects put out a good one on Monday or Tuesday of this week to show the his regression of inventories to price and that's this has always been our compass. It's always the best determinant of the over or under supply of the market because if inventories are falling globally the market's under supplied and we have fallen as I mentioned earlier by 4.2 million barrels per day since the beginning of the war. So the impact of of the loss of supply which we're going to touch on in a few moments time. But if you look at okay what is that fair value for oil at least using what has been a proven pretty good proxy for the
[05:02]
past several decades their implied oil price for Brent was something like $130 or $140 oil. And so you've got this massive massive disconnect between where we sit today where oil should be and instead what is the market fearful of and how is that impacting price today. And so there's a few reasons why we think you are getting this significant historic really literally historic disconnect between the oil price and what we estimate fundamentals are today and more importantly what are they going to be like in 3 months 6 months a year from now. So why the breakdown? One of it is and this is meant to be an excuse but there are two markets for oil. We've touched on this in in many times in the past. You've got the physical market for oil. let's call it 104 105 million barrel per day market and then you've got the financial market for oil. For every one barrel that is consumed 50 of them get traded on a daily basis. And so if you look back from the high in terms
[06:00]
of net speculative length we put up a chart a few days ago since April of 28th the level has fallen uh to the lowest since February of 2026. So we look at okay the liquidation in paper barrels it's been um uh it's gone from 511 million barrels net length to 160. So like a massive liquidation. So we're now pre back to pre-war levels when the market was fearful of the glut you know the oil gluten and we we had coined it the most anticipated oil supply glut in history. And so we use net length as a proxy for sentiment and sentiment is now back to where it was you know before all of this started before we wiped out half a billion barrels on on on all that. The second is there is some weakness from a supply perspective you. There's too much supply in the very short term. So why is that? We have seen again uh part of theou which is still being debated and we can touch on that and we don't have time to go into it in detail but part of theou was to unfreeze or to undo some
[07:03]
sanctions and so that liberated about 140 million barrels e of Iranian barrels that's not just barrels that were in the straight but there was there was barrels elsewhere off the coast of India and China which were not being wholly purchased that are now accessible. The second is you have seen an exodus uh out of the out of the straight clearly all these poor guys that have been stuck on a ship for like three or three months. So you have seen a surge out of the straight and that has been averaging about 10 ships a day for the past seven days, you know, depending on whether there's missiles being shot at them or whatnot, but roughly 10. So you the market is is absorbing the that surge of ships saying, "Okay, let's get out of here." Plus those unsanctioned barrels. So it's it's it's a timing uh aspect which we think will take roughly another month to maybe two months. We're we're going to see way more importantly and what we're watching is what is the inbounds into the the straight because
[08:01]
if you recall as store onshore storage filled in the Middle East producers had to shut in production and the estimate was as high as 15 million barrels of curtailed at the very high of curtailed production. This is before Saudi really ramped up the East West pipeline, got more oil out of the Red Sea, before the Emiratis really ramped up a capacity of Fujara just south of the straight etc. And so using real time uh data provided by OX which is a a data provider that we use when we look at okay how much production is still curtailed because we're told what are we told every day that the street's fully open we're back to normal. So as of this morning, their estimate is curtailed production is at 8.6 million barrels per day. So this includes Saudi Arabia, Iraq, Kuwait, uh UEI, and and Qatar. Add on to that another roughly 800,000 barrels per day from Iran. So we're still sitting at about 9.4 million barrels per day of shutin production. Another stat that we
[09:02]
got from Rory Johnston uh who does really excellent oil macro work is when you look at the relationship between oil loadings, so that's oil being loaded onto the tankers versus the oil leaving the straight, it's only 50%. And so it's it's further evidence that there's this dichotomy between the amount of oil exiting the straight because it was all just, you know, stuck on these tankers versus what the actual, you know, sustainable level is. is and so there's a massive divergence between that and so we think the oil price weakness we're experiencing now shouldn't have been surprising we were actually positioned for it in the fund I'll touch on that in a few minutes time but it's just a waiting uh time why did we not see the price spike that many people and we have access to an incredible team of people all around the world from from ministers to former adviserss to presidents to former and current Wall Street you know superstars cars. There was a rarely in
[10:02]
my career, in fact never, has there ever been a cohesion around where we all thought that the oil price was going to go. And we thought ultimately there was this mismatch between supply and demand. We're going to have this massive draw down in inventories. There was going to be regional product shortages and the oil price would go high would have to go high enough to kill demand because you'd have this imbalance. And we're not far off from that. you know, Cushing stocks at tank bottoms. We've talked about how depleted regional stocks have have become, but why did we not get that price spike? And it as a re reminder, sometimes in life, you don't get what you want. We weren't from an equity performance perspective. We did not want, you know, the $150, $170 oil because that was really going to stoke recessionary fears. The hangover from that would have been enduring. And we thought that the correlation between oil uh equity performance, which we're equity investors, that's what we care about, to the oil price at once you
[11:00]
breach a of a a certain price point, the relationship between oil stocks and oil price would start to fault because of those concerns about uh of recessionary fears and demand fears, etc. And our intent, our playbook was we were going to be significantly selling length into that spike. So why did we not get the price spike? It comes down to one single factor and that is China. Uh it took time to get the data. We subscribed to a lot of different data sets. One of it is Kepler's look at um vessels leaving you know the straight for example. And what surprised us and surprised everybody was the magnitude by which China dropped their oil inventories. Just for the month of June their oil imports are down by 4.9 million barrels per year. It's a staggering amount. They've forfeited imports of almost half a billion barrels. We're roughly 450 million barrels of of imports. So it's it's massively offset a lot of the lost
[12:02]
Middle Eastern production. Again, at the high of 15, we were running with 11 to 12, you know, just under 9 around 9 million barrels per day today. And so there's very little clarity in terms of why they dropped imports by that magnitude. There are suspicions such as they were trying to basically do a favor for regional economies. They did have a lot of built uh stockpiles both in SPR and refined product. Some of it is visible to us and satellites. Others is a large part of it is invisible. And so there's a narrative that well gez it must mean that their demand is down so much right you know mobility or weak economy or whatever. Every mobility stat that we look at both within China and globally shows that product demand oil demand ex that one little factor remains very very strong. You know you look at uh flight data which is publicly accessible very very strong. You look like TomTom data for for mobility for
[13:01]
road traffic etc remaining very very strong. I mentioned crack spreads uh in the United States as of now there's at $57 per barrel. The all-time high was in March $59. So, it's still up 182% year-to- date. It's it's it's a rounding year off of the all-time highs. And so, you can't have weak product demand, I weak oil demand, and have crack spreads at their almost record highs. Like, when I say record, I mean it in any period in human history. And so, it's really been this weird buying behavior from China. Now, it's it's unsustainable. You cannot drop your imports by 5 million barrels per day when your domestic demand remains very strong. And so the thought is that they've been depleting invisible stocks of refined product, distillates, you know, diesel, gasoline, jet fuel, etc. And so eventually they will have to come back to the market. And when they do, the tightness of what we've been talking about will become much much more obvious. And so it's really a a timing cadence from how long will it take for
[14:01]
the Middle Eastern producers to ramp their production back up. to allow that. What they need is more vessels to be inbound into the straight and there's just so much uncertainty in terms of this 60-day now we're we're down to like 45 days or whatever of thisou what is it actually going to translate into what kind of agreement will the IRGC remain in control of the straight through you know the Persian Gulf uh straight authority will the Saudis will the Emiratis be willing to pay effectively a ransom to people that were just bombing them and killing their citizens? I have a tough time believing that, but we're going to see how that translates to. The the other factor too, and we've mentioned before, is there are the halves and the have nots within those country, the Middle Eastern countries that had to shut in production. We always expected the Amiradis and the Saudis to come back quickly. It was really the have nots, which are really the Iraqis, we think, that will be the the the last barrels to be coming back
[15:01]
onto the market. They're down 2.5 million barrels per day right now from prior highs. People that we've talked to, they've they were always the concern around the the bureaucracy within Iraq. Also, the geology that was going to translate into those barrels remaining offline and that's the market is just not there. Uh the second thing is as we look forward it all comes down to China when with having forfeited 450 million barrels of imports as they those barrels have had to come from somewhere and it's being depleted from domestic uh stocks when do they come back and when they do that's when we think that the oil price will find a floor. We as we look and we'll just wrap up the over time as we we were hoping but a lot of information to cover uh in our funds we were positioned for what we thought was the potential for a a sell-off whenever there was resolution. Uh we were uh roughly 25% cash uh about a month ago uh anticipating uh weakness. You know, we
[16:01]
thought at that time, you know, if we had 75% offense, 25% defense, it's the reason why a draw down in the sell-off over the past couple weeks has been more more modest than it would have been. Um, as we have looked at the uh opportunities that become available to us in just in the past couple weeks, we've been deploying that pretty aggressively. So, our cash has gone from roughly 25 to six. What excites us now is what we were consistently told by trading desks both in Canada, the United States, is there's this recognition of the tightness within the oil market, but people just didn't couldn't want to handle they couldn't endure the volatility from the geopolitics. You know, what's Trump going to tweet out today? That's at least from consensus that is now over. And so we are starting to see uh buying power that was on the sidelines come into the names. We think that energy stocks uh today are discounting roughly a $60 WTI. We had talked about before how we thought a $80
[17:00]
oil price was going to be kind of the floor. Obviously, we're below that right now. We've got this surge of barrels to be absorbed. We also thought that they would was reasonable that there would be a political risk premium embedded in the oil price. Maybe, maybe not now given just the unbelievable apathy in the market. So, we go back to what's the marginal cost to supply? Who is that marginal supplier? As a reminder, with if you looked at pre-war OPEC, we thought spare capacity was only about 1.4 million barrels uh per day. We've had the Emirates UE leave OPEC subsequent from that. And so we think there's a little latent capacity within the UEE. But as a reminder, there's roughly four out of the now 79 nonPEC producers that have the capability to grow. And it remains uh Canada. We're kind of bottlenecked at right now for the next year to two years. you get modest growth out of Gana and Brazil, it's really going to be US shale. You know, the twilight of shale, we've talked about how we expect only very modest production growth at a price. We continue to think that the $70 is that
[18:01]
marginal cost of supply. And so with equities discounting 60, we see pretty meaningful upside uh with what we think now is a much more conservative uh price estimate. So with that, this was a lot longer than we had intended. There's a lot of material to cover. We look forward to future updates. We very much appreciate your time.
AI Prompt
AI-generated from source material. Verify important details against the original source.
AI Implementation Prompt
CONTEXT You are working from a July 2, 2026 oil market update by Eric Nuttall, Senior Portfolio Manager of Ninepoint Energy Strategies at Ninepoint Partners. The core thesis: the oil price (high $60s, below pre-war levels) has historically diverged from physical fundamentals. Global inventories are at record lows for the time of year, having swung from a 177 million barrel surplus to a 141 million barrel deficit against the five-year average, with roughly 430 million barrels drawn since the war began (4.2 million barrels per day of tightness). US commercial crude is at its lowest since at least 2016, crack spreads sit near all-time highs ($57 per barrel), and the US SPR is at 325 million barrels, the lowest since June 1983 and near a functional engineering floor of roughly 300 million barrels. The inventories-to-price regression, Nuttall's fair value compass, implies Brent at $130 to $140. He attributes the gap to three mechanisms: (1) paper market liquidation, with net speculative length collapsing from 511 million barrels to 160 million while 50 paper barrels trade per physical barrel consumed; (2) a temporary supply surge from roughly 140 million unsanctioned Iranian barrels plus backlogged tankers exiting the Persian Gulf at ten ships per day, while 9.4 million barrels per day of production remains shut in and only 50 percent of loadings represent sustainable exports; and (3) China cutting imports by 4.9 million barrels per day in June, forfeiting roughly 450 million barrels by depleting largely invisible domestic stockpiles despite strong demand evidenced by flight data, road mobility, and record refining margins. Ninepoint held 25 percent cash into the anticipated sell-off and deployed to six percent cash into weakness. Nuttall estimates energy equities discount roughly $60 WTI against a $70 marginal cost of supply (US shale as the marginal supplier in its twilight), with meaningful non-OPEC growth limited to US shale, Guyana, Brazil, and a bottlenecked Canada. KEY PRINCIPLES 1. Inventories are the compass: falling global inventories mean an undersupplied market regardless of price action or headlines. 2. Price and value can diverge for months because the paper market (50x physical volume) sets short-term price through sentiment and positioning. 3. Net speculative length is a sentiment gauge; capitulation lows against tightening physical data skew risk to the upside. 4. Crack spreads are a demand truth serum: near-record refining margins are incompatible with weak end demand. 5. One large actor (China) can temporarily suppress price by depleting finite stockpiles, but a buyer strike against strong domestic demand is unsustainable. 6. Judge supply recovery by measured data (inbound vessels, curtailment estimates, loadings-to-exports ratios), not reopening headlines. 7. Political incentives (elections, SPR policy, announcement timing) actively suppress price signals in the short run. 8. Value energy equities off the marginal cost of supply, not price forecasts; the gap between what equities discount and the marginal cost is the margin of safety. 9. Hold dry powder ahead of foreseeable catalysts and deploy into fear (75/25 offense-defense, then 94/6). 10. As an equity investor, do not root for demand-destroying price spikes; pre-plan selling into them because the stock-to-commodity correlation breaks at extremes. KEY LEVERS - Inventory tracking (global balances, US commercial stocks, floating storage, SPR levels) as the fair value anchor - Positioning data (net speculative length) as the sentiment and timing overlay - Demand verification through crack spreads, flight data, and road mobility rather than import statistics - China's monthly import figures as the single dominant catalyst for price normalization - Marginal cost of supply ($70) versus equity-discounted price ($60 WTI) as the valuation spread - Cash management around known catalysts (resolution events, geopolitical announcements) WHAT THIS IS NOT - Not a prediction that oil converges to $130-$140 fair value; a spike to demand-killing levels is explicitly unwanted by equity investors. - Not a claim that demand weakness is impossible; it is a claim that current data (crack spreads, mobility) falsifies the weak-demand narrative today. - Not a headline-trading framework; it explicitly rejects reacting to reopening announcements and political tweets in favor of physical data. - Not a permabull position; the fund raised 25 percent cash when it anticipated a sell-off, demonstrating the framework cuts both ways. - Not applicable without data discipline; the framework depends on tracking specific measurable series, not narratives. IMPLEMENTATION MODES 1. Apply: help me apply the inventories-to-price framework to current oil market data I provide, estimating whether the market is over- or under-supplied. 2. Build: help me build a monitoring dashboard or checklist covering inventories, net length, crack spreads, China imports, curtailed production, and inbound vessel counts. 3. Diagnose: given a price move I describe, help me diagnose whether it is paper-driven (positioning), physically driven (balances), or politically driven (announcements). 4. Critique: stress-test my oil or energy equity thesis against this framework, identifying which data would falsify it. 5. Decision Support: help me structure position sizing, cash levels, and pre-planned sell zones around foreseeable catalysts using the offense-defense model. 6. Teach: explain any concept from this source (crack spreads, net length, SPR mechanics, marginal cost of supply) at whatever depth I need. 7. Content Creation: help me turn these frameworks into newsletter sections, social posts, or client-facing explanations in a matter-of-fact, data-supported tone. 8. Research Expansion: identify data sources, analysts, and reports that extend this framework (EIA, CFTC COT, tanker tracking, refining margin data). 9. Scenario Planning: model how the thesis evolves under different China return timelines, Iraqi production recovery paths, or political interventions. AI OPERATING INSTRUCTIONS Remain grounded in this source and its specific data points; do not drift into generic energy commentary. Focus on practical implementation over opinion. When data has likely changed since July 2026, say so and identify what to verify rather than guessing. Challenge weak assumptions in my reasoning, especially narrative-driven conclusions unsupported by physical data. Draw connections to adjacent frameworks (commodity cycles, positioning analysis, contrarian investing) when useful. Ask clarifying questions when my request is ambiguous. Avoid motivational filler. GUIDED DISCOVERY Ask me up to three questions, one at a time, to determine: (1) what I am trying to accomplish, (2) which ideas from this source are most relevant to my situation, (3) how these concepts could be applied most effectively. Once you understand my situation, help me build a practical implementation plan.